HG 


IRLF 


3b 


THE 


YEAR'S  PROGRESS 
THE  UNIFORM  LAW 


BY 


WALTER  S.  HILBORN,  Esq. 

Acting  Director,  Division  of 
Remedial  Loans,  Russell  Sage  Foundation 


ADDRESS  DELIVERED   BEFORE  THE 

EIGHTH  ANNUAL  CONVENTION  OF  THE 

AMERICAN  INDUSTRIAL  LENDERS  ASSOCIATION 

NEW   YORK,  SEPTEMBER  20,  1922 


The  Year's  Progress  and  the  Uniform  Law 

WALTER  S.  HILBORN,  Esq. 

Acting  Director,  Division  of  Remedial  Loans,  Russell  Sage 
foundation,  New  York  City 

THE  Uniform  Small  Loan  Law  had  its  inception  in  the  city 
of  New  York.  In  November,  1916,  only  six  years  ago, 
representatives  of  your  organization,  in  conference  with 
representatives  of  the  Russell  Sage  Foundation,  agreed  upon  the 
language  of  the  first  draft,  and  since  that  date,  from  time  to 
time,  we  have,  with  representatives  of  other  organizations,  made 
slight  changes  in  the  draft,  and  today  the  Uniform  Small  Loan 
Law,  either  in  its  exact  form  or  in  statutes  containing  similar 
provisions,  is  in  force  in  nineteen  states  in  the  United  States, 
having  a  population  of  59,123,981,  out  of  a  total  population  of 
105,710,620.  "Great  oaks  from  little  acorns  grow;"  and  the 
small  conference  held  in  the  city  of  New  York  has  changed  the 
small-loan  history  of  the  United  States. 

I  have  been  accustomed  at  these  conventions  to  give  a  history 
of  the  small-loan  legislation  in  the  calendar  year  past,  and,  of 
course,  shall  do  that,  but  in  addition  I  shall  do  something  more. 
I  shall  endeavor  briefly  but  clearly  to  state  to  the  men  who  have 
made  the  small-loan  business  a  commercial  proposition  the 
groundwork  which  justifies  both  the  small-loan  business  and 
small-loan  legislation. 

The  legislative  history  of  the  year  last  past  can  be  briefly 
told.  There  was  neither  progress  nor  retrogression. 

In  Massachusetts,  an  effort  was  made  to  amend  the  Massa- 
chusetts statute  to  make  the  maximum  rate  which  could  be 
authorized  by  the  supervisor  3^  per  cent  per  month.  By  reason 
of  the  active  opposition  of  the  credit  unions  and  the  lack  of  any 
local  support  for  the  amendment,  except  that  provided  by  the 
licensed  lenders  and  the  Foundation,  the  amendment  failed  of 
enactment.  I  am  quite  confident  that  the  credit  unions  opposed 
the  bill  because  they  were  not  fully  advised  of  the  purposes  of  the 


amendment,  and  by  the  time  that  they  were,  they  were  so  fully 
committed  to  opposition  that  their  position  could  not  have  been 
changed.  Efforts  to  enact  the  bill  in  Massachusetts  still  suffer 
from  the  unwise  efforts  which  were  made  two  years  ago  to  tack 
on  to  the  3^  Per  cent  amendment  a  rider  authorizing  5  per  cent 
a  month  on  loans  under  $50.  The  defeat  of  the  rider  involved 
the  defeat  of  the  amendment  and  required  such  radical  measures 
that  the  Massachusetts  legislators  are  afraid  of  any  amendments 
to  the  present  law. 

In  Rhode  Island  it  had  been  expected  to  make  a  campaign  for 
the  Uniform  Small  Loan  Bill,  but  by  reason  of  circumstances 
quite  beyond  control  it  was  impossible  to  make  any  concerted 
effort.  One  of  the  groups  supporting  the  Small  Loan  Bill  at- 
tempted a  campaign  on  its  own  behalf,  and  as  has  usually  hap- 
pened in  the  case  of  single-handed  and  ill-advised  campaigns, 
it  met  with  failure. 

Similarly,  in  New  York,  an  effort  was  made  to  amend  the 
New  York  statute  by  increasing  the  rate  to  3}^  per  cent  per 
month.  The  bill  passed  the  Senate  but  failed  in  the  Assembly 
due  to  the  late  introduction  of  the  bill  and  its  isolated  support. 

In  Georgia,  an  unsuccessful  effort  was  made  to  reduce  the 
rate  authorized  by  the  Uniform  Bill,  which  was  successfully 
opposed  by  the  efforts  of  the  Legal  Reform  Bureau  and  the 
American  Industrial  Lenders'  Association.  It  is,  of  course,  much 
easier  to  protect  existing  law  than  to  enact  new  law,  and  wherever 
the  Small  Loan  Law  has  been  enacted  it  has  stood  the  test  of 
opposition. 

In  Louisiana,  effort  was  made  to  enact  the  Uniform  Small 
Loan  Law,  again  single-handed,  and  again  the  single-handed 
effort  met  with  failure. 

To  sum  up  the  year's  activities,  the  statute  books  remain  today 
as  they  were  a  year  ago,  but  in  those  states  where  the  Uniform 
Law  has  been  enacted  it  is  operating  successfully  and  efficiently, 
and  has  proved  that  its  supporters  builded  wisely  and  builded 
well. 

You,  who  have  been  among  the  active  supporters  of  the  Uni- 
form Small  Loan  Law  in  the  states  where  it  has  been  enacted, 
and  its  most  enthusiastic  advocates  in  states  in  which  it  has  been 
offered  for  enactment,  know  from  practical  experience  the  benefit 
to  be  derived  from  the  Uniform  Law.  Some  of  you  are  the 


masters  of  the  philosophy  underlying  it,  but  nowhere  is  there 
available  in  brief  space  any  statement  of  the  theory  underlying 
the  legislation.  The  present  seems  to  me  to  be  an  auspicious 
opportunity  to  make  a  permanent  record  of  the  principles  under- 
lying small-loan  legislation. 

There  are  two  theories  upon  which  legislation  affecting  the 
rate  of  interest  has  been  based : 

1.  That  money  is  a  commodity,  and  that  the  price  to  be  paid 
for  the  use  of  money  should  be  regulated  by  supply  and  demand 
and  not  by  legislation.     In  other  words,  that  there  should  be  no 
legislation  limiting  the  rate  of  interest  which  should  be  charged 
for  the  loan  of  money.     England  and  Massachusetts  are  the 
leading  illustrations  of  the  free  contract  rate. 

2.  The  other  principle  is  the  one  which  has  been  carried  down 
through  the  generations,  that  the  rate  to  be  charged  for  the  loan 
of  money  should  be  restricted  in  all  cases  by  legislative  fiat. 
The  legislation  in  most  American  states  has  been  governed  by 
this  principle,  and  the  rate  of  interest  which  may  be  charged  on 
any  loan  varies  from  6  to  10  per  cent  per  annum. 

Thus  the  Uniform  Small  Loan  Law  runs  counter  to  the  theory 
underlying  the  legislation  of  the  free  contract  rate  states,  by 
limiting  the  rate  of  interest  which  may  be  charged  upon  small 
loans,  and  runs  counter  also  to  the  legislative  theory  in  other 
states  by  authorizing  a  much  higher  rate  upon  small  loans  than 
upon  larger  loans. 

Upon  what  theory  and  upon  what  principle  can  the  advocates 
of  small-loan  legislation  justify  this  exception  to  the  principle 
regulating  the  interest  charge  upon  small  loans  in  both  classes  of 
states?  Upon  the  principle  that  the  borrower  of  small  sums  of 
money  requires  the  protection  of  the  state  against  the  rapacity 
of  the  unbridled  lender  in  the  free  contract  rate  states  where  no 
maximum  rate  is  provided  by  the  law,  and  upon  the  theory  that 
both  lender  and  borrower  require  the  protection  and  authoriza- 
tion of  the  state  where  by  hard  and  fast  rule  an  unreasonably 
low  maximum  contract  rate  is  provided  by  the  legislature. 

There  is  implied  in  what  I  have  already  said  an  assumption 
that  small-loan  business  should  be  authorized  and  not  prohibited, 
and,  of  course,  this  is  implicit  in  the  formal  draft  of  any  uniform 
small-loan  legislation. 

A  person  might  well  conclude  that  it  was  wise : 


1.  To  prohibit  by  legislation  small  loans  where  more  than  the 
normal  contract  rate  is  charged,  or 

2.  To  advocate  the  lending  of  small  sums  of  money  as  a  semi- 
philanthropic,  non-commercial  enterprise,  or 

3.  To  advocate  commercial  lending  of  small  sums. 

The  Uniform  Small  Loan  Law  was  a  definite  commitment  of 
its  advocates  to  the  third  principle,  namely,  that  the  commercial 
lending  of  small  sums  of  money  is  the  best  solution  of  the  small- 
loan  problem.  This  conclusion  is  based  upon  experience,  for  the 
first  possible  solution,  the  attempted  prohibition  of  small  loans 
at  more  than  the  contract  rate,  has  resulted,  in  spite  of  sporadic 
campaigns  against  the  loan  shark,  in  extortion  by  the  illegal 
lender  and  helplessness  on  the  part  of  the  borrower.  As  a  second 
attempted  solution,  there  were  organized  by  men  of  philanthropic 
inclination  remedial  loan  societies  which  were  intended  to  charge 
less  than  authorized  by  the  local  law  and  to  limit  the  profit  to 
the  investor.  There  have  been  organized  in  the  United  States 
twenty-nine  companies,  having  a  capital  of  $13,930,037,  but 
these  semi-philanthropic  ventures  have  not  been  adequate  to 
cover  the  need  of  the  small  borrower. 

Accordingly,  believing  that  small  loans  should  not  be  pro- 
hibited, and  that  there  was  no  underlying  basis  for  placing  the 
small-loan  business  on  a  semi-philanthropic  basis,  those  interested 
in  the  small-loan  field  concluded  that  the  only  permanent  solu- 
tion of  the  small-loan  problem  was  to  put  the  business  upon  a 
definite,  legal,  commercial  basis,  a  basis  upon  which  it  would  be 
commercially  possible — hence  the  Uniform  Small  Loan  Law. 

The  Uniform  Law  is  simple  in  form  and  simple  in  theory.  It 
authorizes  any  person  to  obtain  a  license  from  the  state,  and 
having  obtained  a  license  to  make  loans  of  $300  or  less,  and  to 
charge  therefor  not  in  excess  of  3^  Per  cent  a  month  on  unpaid 
balances;  it  regulates  strictly  the  conduct  of  the  business  of  the 
lender;  it  prohibits  and  provides  suitable  punishment  for  loans 
of  money  by  unlicensed  lenders  in  excess  of  the  contract  rate 
provided  by  the  state.  The  Uniform  Law  thus  enables  com- 
mercial lenders  to  engage  in  business  and  provides  suitable 
penalty  for  violations  of  the  law  by  both  licensed  and  unlicensed 
lenders. 

Opposition  to  the  Uniform  Law  comes  from  two  groups  of 
people:  From  the  uninformed,  who  do  not  understand  why  more 


than  6  to  10  per  cent  per  annum  should  be  charged  on  small 
loans;  and  from  the  interested  who  do  not  want  their  illegitimate 
business,  in  which  they  charge  from  10  per  cent  a  month  up,  to 
be  affected.  The  Uniform  Bill  has  often  met  the  open  opposition 
of  the  former  class  and  the  private  and  secret  intrigue  of  the 
latter  class. 

But  one  argument  is  ever  heard  against  the  bill:  "Why  charge 
42  per  cent  per  annum  to  a  poor  man  when  we  charge  6  per  cent 
per  annum  to  the  rich?"  To  those  who  will  hear,  the  answer  is 
simple.  The  small  money  lender  deals  in  cash.  The  commercial 
lender,  the  bank,  deals  in  credit.  The  cash,  once  lent,  cannot  be 
lent  again.  The  amount  of  credit  lent  is  limited  only  by  the 
required  reserve.  To  illustrate:  In  the  state  of  Kentucky,  when 
the  Small  Loan  Bill  was  up  for  hearing  before  the  banking  com- 
mittee, I  made  the  statement  that  in  Kentucky,  where  the 
required  banking  reserve  was  10  per  cent,  a  bank  could  lend  its 
credit  ten  times,  so  that  although  not  more  than  6  per  cent  could 
be  charged  on  any  one  loan,  a  bank,  by  making  loans  up  to  ten 
times  its  capital,  could  get  60  per  cent  upon  its  capital,  although 
not  more  than  6  per  cent  was  charged  on  any  one  loan,  to  which 
one  of  the  members  of  the  committee  replied:  "Yes,  we  make  48 
per  cent  net  on  our  capital."  In  addition,  each  transaction  is 
small  and  the  debt  must  be  collected  in  small  monthly  install- 
ments so  it  is  comparatively  expensive  to  put  through.  It  is 
quite  clear,  therefore,  that  a  law  which  regulates  the  rate  of 
interest  authorized  by  banks  cannot  apply  to  the  rate  of  interest 
which  must  be  charged  by  the  lenders  of  small  sums  of  money, 
and,  accordingly,  it  is  necessary  to  make  a  larger  charge  on  small 
loans  than  is  made  on  large  ones.  We  are  dealing  with  a  distinct 
enterprise  which  requires  separate  treatment. 

There  remains  but  one  factor  to  be  considered:  Why  3^  per 
cent  a  month  instead  of  any  other  charge?  The  answer  is  not 
so  simple  but  it  is  satisfactory.  We  are  seeking  a  rate  which  will 
interest  legitimate  capital  to  satisfy  the  small-loan  requirements 
of  every  state  requiring  small-loan  service,  and  it  has  not  yet  been 
demonstrated  that  commercial  capital  will  enter  the  small-loan 
field  if  a  smaller  rate  is  authorized.  We  do  know  that  wherever 
the  Uniform  Law  has  been  enacted  the  small-loan  needs  of  the 
state  have  been  adequately  met,  and  the  business  placed  upon  a 
dignified  plane.  We  do  know  that  in  some  states  where  less  than 

6 


Per  cent  '1S  authorized,  the  small-loan  need  is  not  adequately 
met. 

It  is  perfectly  clear  that  small-loan  business  is  not  commercially 
conducted  in  a  state  like  New  York,  where  only  2  per  cent  and 
fees  are  authorized,  although  two  large  corporations  are  engaged 
in  the  pledge  and  chattel  loan  business.  But  they  are  semi- 
philanthropic  enterprises;  the  return  to  the  investor  is  strictly 
limited.  No  strictly  commercial  lending  of  small  sums  is  being 
carried  on  to  any  extent. 

It  is  likewise  true  that  in  Massachusetts  the  small-loan  field 
throughout  the  state  is  not  covered,  and  the  commercial  lenders 
do  not  seem  to  be  making  an  adequate  return. 

The  most  efficiently  authorized  business  operating  with  the 
largest  possible  capital  may  make  more  than  would  strike  the 
average  man  as  proper.  A  small  licensed  lender  in  a  medium- 
sized  town  may  struggle  to  make  a  living  under  the  Uniform  Law. 
The  example  of  the  lender  with  small  capital  is  no  more  an  argu- 
ment for  increasing  the  rate  carried  by  the  Uniform  Bill  than  the 
success  of  the  large  and  well-organized  lender  is  an  argument  for 
reducing  the  rate.  The  fact  is  that  with  a  rate  of  3^"  per  cent  a 
month,  the  small-loan  needs  in  every  state  where  the  Uniform 
Bill  has  been  enacted  seem  to  be  provided  for,  and  the  Uniform 
Bill,  carrying  a  maximum  rate  of  3^  per  cent  a  month  on  un- 
paid balances,  has  proved  to  be  a  practical  solution  of  a  practical 
problem. 

The  student  of  the  small-loan  field  has  met  the  practical  man 
of  affairs  in  the  small-loan  business  and  together  they  have  solved 
the  problem.  The  commercial  lenders  operating  under  the  Small 
Loan  Law  have  made  their  business  a  recognized  honorable 
commercial  venture. 

Your  organization  merits  the  commendation  and  approval  of 
men  of  affairs,  and  I  am  proud  of  the  fact  that,  hand  in  hand 
with  representatives  of  the  American  Industrial  Lenders  Asso- 
ciation and  with  others,  we  are  making  efforts  in  state  after  state 
to  bring  to  borrowers  of  small  sums  the  advantages  which  accrue 
from  the  enactment  of  the  Uniform  Small  Loan  Law. 


STATES   HAVING  UNIFORM   LAW 
POPULATION 

Arizona 334,162 

Connecticut 1,380,631 

Georgia 2,895,832 

Illinois       6,485,280 

Indiana 2,930,390 

Iowa      2,404,021 

Maine 768,014 

Maryland 1,449,661 

Pennsylvania 8,720,017 

Total 27,368,008 

STATES  HAVING  SIMILAR  LAWS 

POPULATION 

Colorado 939,629 

Massachusetts 3,852,356 

Michigan      3,668,412 

New  Hampshire      443,083 

New  Jersey 3J55,9OO 

New  York 10,385,227 

Ohio 5,759,394 

Oregon      783,389 

Utah      449,396 

Virginia 2,309,187 

Total 31,755,973 

Total  population  of  the  United  States 105,710,620 

States  having  Uniform  Law      27,368,008 

States  having  similar  law 3i>755,973 

Total                59,123,981 


Tacijse,  N.  Y. 

PAT.  JAN  21,1908 


UNIVERSITY  OF  CALIFORNIA  LIBRARY 


